How the financial meltdown affects mortgage rates

CHICAGO – Sept. 18, 2008 – The meltdown in the financial and housing markets continues to create a series of good news/bad news scenarios for consumers who either already own their own home or would like to buy one. Here's how areas of the market are affected:

Fixed-rate mortgages: Interest rates on conventional fixed-rate mortgages continue to slip, as investors move their funds from stocks to safer vehicles like 10-year Treasury notes, the yields of which help set mortgage rates. Last Wednesday, the average rate on 30-year fixed loans was 5.73 percent, and mortgage bankers question how much lower it can really go.

That means if you can qualify for a loan under the tighter underwriting standards - and yes, they are tight - it may be time to buy.

However, real estate agents say many potential first-time buyers, the segment of consumers needed to jump-start the entire market, remain on the sidelines, guessing that housing prices will fall further. Some researchers have predicted that prices will continue to fall this year.

Adjustable-rate mortgages: Dig out your documents and carefully read the terms of that adjustable-rate mortgage you received a few years ago. Find out if it's tied to the LIBOR, the London Interbank Offered Rate, and if it is, whether it's linked to the three-month, six-month or one-year LIBOR. Also check when the next adjustment will be made and then keep track of LIBOR fluctuations until then.

LIBOR rates, a benchmark for interbank lending rates, are used to help set adjustments on some ARMs, and the financial market's undoing is causing wild swings in LIBOR.

"Many borrowers look at the initial rate (but) an ARM like a LIBOR can really devastate you quickly," said Michelle Collins, senior vice president, mortgage lender, ShoreBank.

Don't automatically assume that if you qualified for a fixed-rate loan or an ARM a few years back, you can convert the loan or refinance yourself into better terms now.

Mortgage bankers say because homes have depreciated in value, credit scores need to be stellar. Customers who want to buy a home need to make significant downpayments and those who want to refinance or convert their loan have to show they still have substantial equity in what is now a depreciating asset.

"The old rules don't apply," said Jeff Slater, vice president of Bank Group Mortgage in Palos Hills, Ill.

One other warning from lenders: Don't bother asking about refinancing for the purpose of taking cash out of the house because it's largely off the table.